A Budget Holdback Policy for Multi-Item Procurement Processes

Abstract

This paper is concerned with the development of an optimal budget holdback policy for a multi-item procurement process. An annual budget is made available for the purchase and resupply of n items. The issue is to determine how much of the budget to commit initially and how much to hold back for spot purchases later in the year. An analytic solution to the problem is developed for the single item case and compared to the unconstrained “newsboy” solution. In the multi-item case we develop stochastic linear programming with resource models under two views of the organization's procurement process. The first view is that the overall budget is allocated to the individual item managers and spot purchase monies earmarked for one item cannot be used for another. The computational and data requirements for solution of this model are reasonable. The second view is that spot buy monies are pooled and allocated to individual items on an “as needed” basis. The linear programming model of this procurement process is much more complex and not computationally feasible for more than a few items. However, the budget allocation model of the first view is shown to be a good heuristic for determining the percent of funds to hold back for the pooled process. A numerical example and sensitivity analysis are included.